IE 11 is not supported. For an optimal experience visit our site on another browser.

Before trading clunker, examine your finances

Before you make the move to trade in your gas guzzler, you should consider the total impact on the family budget of owning a new car.
/ Source: The Associated Press

Is the government's cash-for-clunkers rebate and the thought of that new car smell about to pull you off the couch and into the nearest showroom?

Before you take the leap, you should consider the total impact on the family budget of owning a new car. And think about that old car you'll be trading in — in particular, the fact that it may have meant no car payment, cheaper insurance and lower licensing fees than you're about to face.

Here are some questions and answers about whether it makes financial sense to leave your clunker behind and drive off in a new car.

Q: What factors should I consider?

A: Although the $3,500 or $4,500 you'll save through the government's cash-for-clunkers program seems very enticing, be sure to look at all the other costs associated with owning a new car.

The most obvious cost is your new car payment, especially if you're no longer making payments on your old car. But even if you've already factored this in — say, if you were already planning to buy a new car before this program came along — don't forget that a new car will likely also increase your insurance premium and annual licensing fees.

Of course, the new car likely will save you money on gas and maintenance costs.

How will the numbers balance out?

Try this online calculator, which allows you to compare all the costs of your old car to those of a new car to see how your situation adds up:

You might also want to plug a used car you might consider buying into the calculator and compare its cost with that of the new one with the rebate. And keep in mind another cost associated only with new cars: depreciation. A new car can lose 20 percent of its value when you drive it off the lot, while a used car suffers no such loss in value.

Q: How can I assess the cost of keeping my older car, to figure out whether it's a good idea to trade it in?

A: The cost of owning a car includes more factors than you might think., an auto consumer Web site, has identified eight components: depreciation, interest on financing, taxes and fees, insurance premiums, fuel, maintenance, repairs and any federal tax credit.

A Web calculator on the Edmunds site will help you figure the true cost of owning a car, whether new or used. It could be helpful in making decisions about whether to buy. It's located here:

Q: Is there a rule of thumb about how much I should spend on a car?

A: When considering whether to commit to a monthly car payment, you shouldn't plan to spend more than 15 percent to 19 percent of your income on transportation, said Tahira Hira, a professor of personal finance and consumer economics at Iowa State University. That figure includes car payments and operating costs like gas, insurance, licensing and maintenance.

Hira said it's acceptable if the government rebate persuades you to buy a new car instead of a used car, but you should not let it push you into paying more than you had planned.

And if you were planning to buy a car in the next year or two anyway, and the government deal saves you money — then, by all means, shop.

Q: I have an older car, but it gets good mileage, so it doesn't qualify for cash for clunkers.

But I still want even better mileage, to save money on gas and make the world greener. Are there deals besides cash for clunkers that could help me?

A: Car manufacturers are offering thousands of dollars in cash back, discounts or low-interest financing on many models, said Mike Caudill, spokesman for, a car pricing and information Web site. Ford, for example, still offers zero percent interest for a six-year loan on some models, he said. Other manufacturers are offering cash back deals ranging from a few hundred dollars to as much as $4,500.

The bottom line: Do your research before you go to the dealer to know what your trade-in is worth and what deals are being offered by manufacturers.